Crypto Dictionary

Limit Order in a Nutshell

A limit order is a type of order that allows traders to buy/sell assets at a pre-specified price. Limit orders guarantee that orders will be filled at a certain price, or better.

Cryptocurrencies have come a long way since their inception. From a mere point of view as a speculative asset to what they currently represent, cryptocurrencies have had a remarkable journey.
 
However, cryptocurrencies are also known for their volatile nature. As a trader or investor, it is best to have maximum control over your trades. This is useful for new traders to keep them from burning their accounts, especially in a prolonged bear market where the prices can plummet unpredictably.
 
If you're a trader, you definitely know that there are different order types that can affect the way you trade and the returns that you earn. A limit order is one such order type that can help you have greater control over your cryptocurrency trades.
 
Let us dive deeper into what limit orders are and why they are important to you as a trader.

Key Takeaways

  • Limit orders are an order type that lets traders set a specific buy or sell price.
  • They provide greater control over the execution price than market orders.
  • Limit orders have usually a preset expiration, so traders must keep an eye on the market volatility.
  • Limit orders can be a great tool to minimize potential losses.

What is a Limit Order?

 A limit order is quite straightforward and easy-to-use order type. It encompasses a specific buy or sell price. There are basically two types of limit orders: a buy limit order and a sell limit order.
 
The limit order allows traders to decide the parameters or price limit for buying and selling their cryptocurrencies. A limit order provides you with greater control over the execution price than market orders, which immediately execute trades at the current price.
 
You don't need to keep an eye on the market constantly or worry that you'll miss a buy or sell opportunity while you're sleeping because limit orders are automated.
 
It should also be noted that there is a high chance that the limit order doesn't get placed. This can happen in a situation where the market switches directions and the prices don't hit the limit price.

How does a Limit Order work?

A limit order will be immediately added to the order book after being submitted. But until the coin price touches the specified limit price, it won't be filled.
 
Take, for instance, the case where you want to sell Ethereum at $1500 and the current price is $1400. A sell limit order can be placed for $1500. Depending on the market liquidity, when ethereum reaches $1500, your limit order will be executed.
 
Before placing a limit order, one thing to be careful of is the order's expiration date. This is mainly because the general limit order can last up to 90 days. If you don't pay attention to the market volatility, then you might be in a situation where you either sell or buy at a less desirable price.
 
Consider that the current price of ethereum is $1400 and you set the sell limit order at $1500. However, for some reason, the price of Ethereum surged to $1700. In such a situation, your sell limit order will be executed at $1500, and you wind up in a situation where your profit is considerably less than what you could have made.

Final thoughts

A limit order is a great tool for traders who want to buy or sell a cryptocurrency at a particular price. It can also come as a great tool to minimize the potential for loss.
 
However, all trading tools are not meant for everybody. Before you decide on what order type to choose, you have to initially analyze your portfolio and the current trading strategy that you're following. It is also in your best interest to try out different strategies and choose the one that suits you the best.

FAQs

What is the difference between a limit order and a stop-limit order?

A limit order is an order requesting the purchase or sell of securities should a specific price be met. A stop-limit order builds one additional layer that requires a specific price be met that is different than the sale price.

How can limit orders be used?

Limit orders can be used in conjunction with stop-losses to prevent large downside losses.

Stop orders are used to set a maximum loss on a trade. When the stock price drops to the stop order price, the limit order is triggered and the trade is filled at the limit order price or better.

How long does a limit order last?

The term of the limit order will depend on the specification and the brokers policy. Many brokers default limit orders to only 1 day. Other brokers may offer a specific number of days (i.e. 30 days, 60 days, or 90 days). Some brokers offer limit orders that are considered good until filled; the limit order will remain valid until it is filled or deliberately canceled by the trader.

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